JPMorgan Seeks to Move Lehman's $8.6 Billion Lawsuit

By IBT Staff Reporter On 09/26/11 AT 9:28 PM

A flag hangs on the wall of the JP Morgan company stall on the floor of the New York Stock Exchange in New York July 15, 2010. Photo: REUTERS

JPMorgan Chase & Co. is asking to move to federal court a lawsuit from Lehman Brothers Holdings Inc. accusing it of siphoning $8.6 billion from Lehman's estate in the days leading up to its record bankruptcy.

In court papers filed late Monday, JPMorgan said the case, filed in U.S. Bankruptcy Court, should be moved to federal court in light of the U.S. Supreme Court's contentious June ruling in former Playboy model Anna Nicole Smith's inheritance battle.

The case, Stern v. Marshall, pitted the late Smith against the estate of her deceased former husband J. Howard Marshall. The court ruled against Smith's estate, saying bankruptcy courts lack authority to decide claims brought by a bankruptcy debtor against a creditor, unless the claims are fully rooted in bankruptcy law.

JPMorgan said in court papers Monday that Lehman's 49-count complaint goes "above and beyond" bankruptcy law, including accusations of fraud, coercion and breach of contract.

Lehman defended the bankruptcy court's jurisdiction, saying in a Monday court filing that the lawsuit's allegations carry a bankruptcy context because they challenge JPMorgan's original proofs of claim against Lehman.

The suit, filed in May 2010, accuses JPMorgan of illegally siphoning about $8.6 billion of desperately-needed assets in the days leading up to Lehman's bankruptcy.

Lehman said JPMorgan, its main clearing bank, used "unparalleled access" to the details of its financial distress to extract the collateral, hastening its $639 billion bankruptcy, which remains the largest ever and was a major catalyst of the financial crisis.

JPMorgan countersued in December, saying Lehman stuck it with more than $25 billion in toxic loans that might never be repaid.

A spokeswoman and lawyer for Lehman did not respond to requests for comment Monday. An attorney and spokeswoman for JPMorgan were also not immediately available Monday night.

The scope of the Supreme Court's ruling in the Smith case has engendered frustration among bankruptcy judges, some of whom have expressed uncertainty as to whether the ruling could stunt their authority.

Judge Robert Drain, of U.S. Bankruptcy Court in Manhattan, said at the American Bankruptcy Institute's Views from the Bench conference earlier this month that the ruling causes bankruptcy judges to "doubt their reason for being."

Judge James Peck, who oversees Lehman's dispute with JPMorgan, said at the conference that he believes the ruling will ultimately have "relatively limited" application in the day-to-day role of a bankruptcy judge.

But Peck added that the ruling has been "weaponized ... on the theory that that which is not nailed down gets picked up."

"This is an argument that is thrown at me in settings that I am confident that (Supreme Court Chief) Justice (John) Roberts never contemplated and would be horrified if he knew about," Peck said at the conference.

Lehman's case against JPMorgan is slated for trial in 2012.

The case is Lehman Brothers Holdings Inc. v. JPMorgan Chase Bank NA, U.S. Bankruptcy Court, Southern District of New York, No. 10-ap-03266. The main bankruptcy case is In re: Lehman Brothers Holdings Inc in the same court, no. 08-13555.